Best’s Special Report: An Approach to Comparing Insurers’ Interest Rate Assumption Changes

OLDWICK, N.J.--(BUSINESS WIRE)--AM Best believes using a 20-year annuity factor facilitates a level playing field in comparing the conservatism of insurers’ GAAP interest rate assumptions embedded in their reserve calculations.

In a new Best’s Special Report, “An Approach to Comparing Insurers’ Interest Rate Assumption Changes,” AM Best notes that the long-term low interest rate environment has been a challenge for life and annuity insurers with regard to the interest rate assumption they use to calculate reserves. The 20-year annuity factor approach generates a comprehensive metric that allows AM Best to compare all ultimate discount rate yield curves across the life/annuity industry.

For this review, AM Best analyzed data related to the ultimate yield curve discount rate that U.S. life, health and annuity GAAP filers use to discount their reserves, and by using a formula detailed in the report, arrived at a score for each of the companies. A high score is indicative of a conservative interest rate assumption, and the more conservatism that is built into reserves generally implies an improvement in profitability going forward as more reserve releases are expected.

Although the annuity factor is mute on other reserve assumptions, it can be useful to compare peers when determining reserve strength as part of the balance sheet strength assessment in AM Best’s rating process. The reserves may be more sensitive to changes in interest assumptions for companies with longer duration products than those with shorter duration products.

With the 10-year U.S. Treasury bond rate rising sharply in 2021, companies may raise their interest rate assumptions for GAAP depending on where rates and spreads are toward the end of the third quarter and the start of fourth quarter of 2021.

To access the full copy of this report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=309946.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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